Momentum Trading Partners shuts raising doubts about future of mini primes

InvestorsOperational RiskPeople MovesPrime Brokerage
31 Jul, 2012

Momentum Trading Partners, a New York-based mini prime, has shut raising further questions about the future of mini primes.

The closure, which was reported in the Wall Street Journal (WSJ), came amid a slump in trading volumes, particularly among its European clients although the paper added US client business remained strong.  The WSJ said senior personnel at Momentum were in discussions with other brokerage firms and a European asset manager hoping to scramble a deal which could keep the firm’s core business intact. An industry source, who wished to remain anonymous, said he did not know which companies were involved in the negotiations.

The source added the latest closure should not come as a shock. “The VIX is at an all time low while hedge funds are not using as much leverage as they did. Furthermore, hedge funds have reduced the number of trades they make. All of these factors are forcing them to reduce the number of counterparties they deal with. Whereas a hedge fund might have traded with 10 counterparties a few years ago, they might now just trade with six. It is killing the sell-side, particularly the smaller broker dealers, and has forced many of their traders, desk analysts and researchers out of work and it has hit existing employees’ remuneration,” said the source.

Mini primes burst onto the scene in 2008 as panicked hedge funds sought to spread their counterparty risk through multiple prime brokerage relationships. Mini primes traditionally service smaller hedge funds which bulge bracket prime brokers refuse to deal with.  However, the sector became incredibly overpopulated which has facilitated a raft of closures and consolidations. Certain investment banks also ceased offering clearing and custody services to mini primes as they tried to reign in their risk exposures. Institutional investors have also told hedge funds they expect them to use brand name prime brokers, which has further dented mini primes’ business.

“Investors want their hedge funds to use well known names and not some unheard of broker dealer. I anticipate there will be a wave of mergers and closures in September. There is a lot of talk about smaller broker dealers and introducing primes wanting to sell their businesses as they are not making money. The same applies to fund administrators,” said the source.

The lack of start-ups and ongoing hedge fund closures is also hurting mini primes. “Mini primes are not attracting enough new clients and a lot of hedge funds have gone out of business recently,” said the source. According to Chicago-based Hedge Fund Research, 232 managers shuttered their doors during the first quarter of 2012, the highest quarterly liquidation total since the first quarter of 2010 when 240 managers closed.

There have been numerous consolidations and closures in the mini prime space since 2010. In August 2011, Concept Capital acquired Alaris following the latter’s abortive bid to merge with I.A Englander, the derivatives brokerage firm. The management team of PCS Dunbar Securities joined Cantor Fitzgerald’s rapidly expanding prime services team in February 2011. Most recently, mid-prime Merlin Securities was acquired by Wells Fargo as the San Francisco-based bank sought to expand its service offering to hedge funds, having purchased LaCrosse Global Fund Services in September 2011.

AlarisCantor FitzgeraldclearingConcept Capitalcounterparty riskcustodyHedge Fund Researchinstitutional investorsLa Crosse Global Fund ServicesM&AMerlin Securitiesmini primesMomentum Trading PartnersWells Fargo